Cyxtera Technologies (NASDAQ: CYXT), a company that operates data centers providing retail colocation services, made voluntary Chapter 11 filings in the U.S. Bankruptcy Court for the District of New Jersey.
Cyxtera’s Chapter 11 bankruptcy filing involves $1.01 billion of total funded debt outstanding and was triggered by rising inflation and interest rates, an inability to sell or refinance the company, customer churn, unprofitable data center leases, and escalating utility costs.
Importantly, Cyxtera’s subsidiaries in the United Kingdom, Germany, and Singapore are not included in the U.S. bankruptcy proceedings. In contrast, the company’s subsidiaries in Canada and the Netherlands are currently undergoing joint administration.
Unraveling the complexities of Cyxtera’s Chapter 11 bankruptcy filing offers an intriguing exploration into the circumstances surrounding this crucial financial juncture. Dgtl Infra delves into the precise factors that led up to this pivotal event, giving a comprehensive insight into Cyxtera’s debt and equity ownership, the company’s core business, and its range of products and services.
Debt Outstanding and Equity Ownership – Cyxtera
Cyxtera Technologies’ outstanding total funded debt, amounting to $1.01 billion, consists of $864.4 million in first lien term facilities, $97.1 million in a senior secured asset-based revolving credit facility, and $50 million in an emergency bridge facility.
|2017 First Lien Term Facility||May 1, 2024||$768.1 million|
|2019 First Lien Term Facility||May 1, 2024||$96.3 million|
|Revolving Credit Facility||April 2, 2024||$97.1 million|
|Bridge Facility||May 1, 2024||$50.0 million|
|Total Funded Debt Obligations||—||$1.01 billion|
Specific first lien creditors, who are key stakeholders in the funded debt structure, have formed an ad hoc group to negotiate and protect their rights during Cyxtera’s Chapter 11 bankruptcy process. These creditors include Bain Capital Credit, Columbus Hill Capital Management, Eaton Vance, Elmwood Asset Management, HPS Investment Partners, Neuberger Berman, Nuveen Asset Management, and Voya Investment Management.
Additionally, Cyxtera’s largest unsecured claims come from several creditors, including:
- HITT Contracting, a data center construction firm with a claim of $3.5 million
- Digital Realty, a wholesale data center operator and major landlord to Cyxtera (see below), with a claim of $2.5 million
- Menlo Equities, a commercial real estate investment firm and landlord to Cyxtera, with a claim of $2.3 million
Cyxtera has entered the Chapter 11 bankruptcy process with approximately $40.7 million in accessible cash-on-hand. Consequently, the company has received a commitment for $200 million in new debtor-in-possession (DIP) financing from certain term lenders. This DIP financing is intended to support the company’s ongoing operations during the Chapter 11 bankruptcy process and beyond.
Cyxtera’s Largest Equity Holders
In terms of equity ownership, Cyxtera lists its key shareholders as BC Partners, which has a 37.9% equity interest; Starboard Value, which holds a 15.7% equity interest; Medina Capital Fund II, which controls a 12.7% equity interest; Fidelity Investments, which has an 11.3% equity interest; and Lumen Technologies (NYSE: LUMN), which holds a 6.4% equity interest.
What Events Led to Cyxtera’s Bankruptcy Filing?
Cyxtera Technologies’ liquidity crisis and subsequent Chapter 11 bankruptcy filing were driven by five main factors: rising inflation and interest rates, an inability to sell or refinance the company, customer churn, unprofitable data center leases, and escalating utility costs. In particular, the company has recently faced significant headwinds from inflation and macroeconomic volatility, which have driven up interest rates and energy prices.
1) Rising Inflation and Interest Rates
In January 2021, the Consumer Price Index (CPI) in the United States was 1.4%, which then escalated to over 9% by June 2022, far exceeding the Federal Reserve’s 2% inflation target. To combat this spike in inflation, the Federal Reserve hiked interest rates.
Consequently, from mid-2022, the interest expense on Cyxtera’s funded debt doubled, considerably weakening the company’s liquidity. By March 31, 2023, the annualized interest expense on Cyxtera’s funded debt, all tied to variable interest rates, had grown from $35.9 million to $75.7 million. This escalation, along with impending debt maturities – such as the Revolving Credit Facility due April 2, 2024, and the First Lien Term Loan Facilities due May 1, 2024 – added more pressure on Cyxtera’s balance sheet.
As a result, Cyxtera’s liquidity has continued to decline, currently amounting to $40.7 million in available cash-on-hand, due to escalating interest rates and substantial debt service obligations.
2) Inability to Sell or Refinance the Company
In 2022 and 2023, Cyxtera actively pursued various financing strategies to address its balance sheet issues. These included considering a sale of the company, seeking new equity injections, and refinancing its term loans. However, the company’s stressed capital structure, coupled with market volatility, hindered the emergence of any actionable proposals.
Cyxtera took several significant steps in 2023 to restructure its debt. In March, the company extended the maturity date of its Revolving Credit Facility to April 2, 2024, thus averting a potential event of default. Subsequently, in May, Cyxtera negotiated a Restructuring Support Agreement (RSA) with an ad hoc group of First Lien lenders. The agreement included a two-phase plan that involved either selling the company or executing an in-court restructuring. Additionally, the company managed to raise an incremental $50 million in liquidity through a Bridge Facility.
Cyxtera has again commenced a marketing process, led by Guggenheim Securities, to attract potential investors for a sale or investment in the company and has formed a special committee to oversee this transaction. To-date, 37 non-disclosure agreements (NDAs) have been signed with prospective investors, which have resulted in six letters of intent (LOIs). The marketing effort continues while Cyxtera simultaneously prepares for a possible court-supervised deleveraging of its balance sheet through a debt-for-equity exchange.
3) Customer Churn
Cyxtera states that “churn through end of May is higher than expected and above budget trend for the quarter” adding that “total churn for the quarter expected to be above budget”. Moreover, the company notes that “first half churn is expected be approximately mid-teens percent worse than budget”.
The chart below illustrates that Lumen Technologies, Cyxtera’s largest customer, has been and continues to be a significant contributor to Cyxtera’s churn. Specifically, in 2022, Lumen generated $59 million in revenue for Cyxtera. However, this figure is expected to decline to $46 million in 2023, representing a 22% decrease.
4) Unprofitable Data Center Leases
Cyxtera operates 61 data centers in 23 large metropolitan areas across the United States, Canada, London, Amsterdam, Germany, Singapore, and Tokyo. However, it is important to note that the vast majority of these data centers are leased, not owned, by Cyxtera.
The company states that “certain individual data centers locations are unprofitable”. To address this, Cyxtera plans to use the Chapter 11 bankruptcy process to either renegotiate or reject its unprofitable leases.
Cyxtera’s preliminary business strategy involves lease renegotiation and rejection, which could result in annual cash rent savings ranging from approximately $20 million to more than $55 million. Ultimately, Cyxtera aims to enhance its operational performance by renegotiating or rejecting its unprofitable data center leases.
Examples of leases that Cyxtera may choose to accept or reject involve two Digital Realty-related companies, namely Digital Realty Trust (NYSE: DLR) and Digital Core REIT (SGX: DCRU).
- Digital Realty: Cyxtera is Digital Realty’s 12th largest customer, leasing space at 15 different locations that are owned by Digital Realty. Cyxtera produces annualized recurring revenue of $63.1 million for Digital Realty, with a weighted average remaining lease term of 9.1 years. Therefore, Cyxtera represents 1.7% of Digital Realty’s total recurring revenue
- Digital Core REIT: Cyxtera is Digital Core REIT’s second-largest customer, representing approximately $16.3 million, or 22.4%, of annualized rent. Cyxtera leases space at six data centers owned by Digital Core REIT, accounting for 26.6% of the company’s total portfolio value. These data centers include three shell & core facilities in Silicon Valley (Santa Clara), two shell & core facilities in Los Angeles, and 1.5 megawatts of a fully-fitted facility in Frankfurt, Germany
5) Escalating Utility Costs
Cyxtera operates data centers that provide colocation and interconnection services, requiring substantial electricity and power. The company’s revenue is influenced by fluctuating market utility prices, which have experienced considerable volatility in recent years.
Historically, Cyxtera has been able to pass-through approximately 90% of utility costs to its customers. However, power costs rose significantly in 2022 due to macroeconomic and political factors.
The company implements utility cost pass-throughs with consideration for customer impact and timing, although some costs are not recoverable within a specific period. Consequently, these circumstances have delayed Cyxtera’s cash inflows from customers, impacting its overall liquidity situation.
Company Overview – Cyxtera
Cyxtera Technologies was founded in 2017 by BC Partners and Medina Capital through a carve-out acquisition of the data center and colocation business of Lumen Technologies (formerly CenturyLink). The company is headquartered in Coral Gables, Florida and has a global workforce of approximately 657 employees.
Cyxtera was the beneficiary of a de-SPAC merger in July 2021 with Starboard Value Acquisition Corp (SVAC), a special purpose acquisition company (SPAC). SVAC, which had completed its initial public offering (IPO) on the Nasdaq stock exchange in September 2020, merged with Cyxtera, providing the latter with approximately $654 million in proceeds, which were primarily used to pay off a portion of its outstanding debt.
Today, Cyxtera is a retail colocation provider that operates 61 data centers. These facilities represent a total power capacity of 251 megawatts across 1.83 million sellable square feet. In addition, the company markets five more locations in India through a partnership with Sify Technologies. In total, Cyxtera’s facilities span 23 large metropolitan areas across the United States, Canada, London, Amsterdam, Germany, Singapore, and Tokyo.
Cyxtera provides colocation and interconnection services to over 2,300 enterprise, service provider, and government agency customers through its data centers. As a whole, approximately 40% of the company’s monthly recurring revenue (MRR) is generated from its top 20 customers, with Lumen Technologies (NYSE: LUMN) alone contributing 7.6% to the MRR.
Customer Concentration as % of MRR – Cyxtera
Cyxtera’s data centers collectively facilitate over 40,000 physical and virtual cross-connects for customers. The company offers both physical and virtual connectivity to more than 1,400 networks from over 307 unique network service providers. On average, each Cyxtera data center hosts 24 network providers.
Products and Services – Cyxtera
In 2022, Cyxtera generated total revenue of $746 million and transaction adjusted EBITDA of $239 million. Presented below is an overview and breakdown of the company’s key products and services. These include colocation (83% of revenue), interconnection (11% of revenue), deployment and support services (5% of revenue), as well as enterprise bare metal (1% of revenue).
Cyxtera provides retail colocation services across 61 data centers located in 23 major metropolitan areas on three continents. Their services offer reliable, secure space and power for customers to host vital applications and workloads within an interconnected ecosystem. The colocation services are flexible, ranging from standard racks or cabinets to custom-designed cages, rack layouts, elevations, and structured cabling solutions.
In select markets, Cyxtera offers SmartCabs – on-demand, dedicated cabinets with integrated power and a configurable network fabric. These SmartCabs enable customers to rapidly deploy and dynamically adjust their colocation cabinets, providing access to a diverse ecosystem of technology and service providers. This approach eliminates the need for customers to supply additional network hardware, thereby accelerating connectivity.
Colocation space and power services are offered under fixed-duration contracts, typically one to three years, providing monthly recurring revenue (MRR) for Cyxtera.
Cyxtera provides enterprises with efficient, high-performance network and cloud connectivity solutions, offering direct interconnection to global-reaching networks and major cloud service providers (CSPs). This service ensures stable, low-latency connections to the entry points (on-ramps) of public clouds, such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, via both virtual and physical links, reducing the unpredictability of the public internet.
Interconnection services help enterprises reduce network costs, increase bandwidth, and enhance network performance and reliability. These services generate monthly recurring revenue (MRR) for Cyxtera and are offered on month-to-month contracts.
Deployment and Support Services
Cyxtera provides a range of services to streamline data center deployment for its customers. This includes custom installation, secure cages and cabinets, structured cabling, and the provision of turn-key environments. In addition, the company offers support services, such as server reboots, telecommunications support, equipment racking and stacking, operating system loading, and critical data backups. Given their one-time or ad-hoc nature, these services typically generate non-recurring revenue for Cyxtera.
Enterprise Bare Metal
Cyxtera provides on-demand access to its own servers and infrastructure for customers lacking IT equipment, facilitating a pay-as-you-go approach to data center services. The company also offers connectivity to partner services, which include private bare metal servers from NVIDIA, Nutanix, Fujitsu, HPE, and Dell. Its Enterprise Bare Metal services, sold through fixed-term contracts, generate monthly recurring revenue (MRR).
Chapter 11 Bankruptcy Advisors – Cyxtera
Cyxtera Technologies is being advised by Kirkland & Ellis as legal counsel, Guggenheim Securities as financial advisor, and AlixPartners as restructuring advisor.